Old Reliable: No Suprises Expected in the Autumn Statement 

Make gilts boring again: If the Autumn Statement moves the markets much then there has been a cock-up. Not that you shouldn’t pay attention, but don’t anticipate huge volatility on this event. The messaging from the Treasury thus far has been very clear – heapings of fiscal discipline and lashings of austerity, no uncosted borrowing. I don’t think there is much more to say about it than that? It’s about restoring credibility in the financial markets and very little else. A surprise or two? Chancellors love to pull a rabbit or two out of the hat and fiscal credibility goes hand in hand with winning the next the election as far as the Tories go, so it might not be as horrendous as some of the various test balloons floated by the Treasury in recent weeks would suggest.

 A credibility premium, though, is worth more right now and the surprises will be saved up for next year ahead of the election…when they can apply some soothing tax cuts and say they could only do that because of the difficult steps taken in 2022. Scrap HS2, as Esther McVey demanded? That would be far too sensible. No, the government will throw more good money after bad down the NHS sinkhole, and rein in spending where it’s needed most, in education.  Solvency II reform has been mentioned, potentially releasing loadsa money for investing in green stuff…that doesn’t butter any parsnips today. Fiscal drag, leaving tax allowances unchanged, will help. But it all goes to a critical problem facing the government – how do you raise taxes without squeezing the already straitened middled anymore?  

Weakconomics – Diluted UK Policy Aims to Rebuild Political Shambles 

Andrew Bailey, the Bank of England governor, told MPs the UK had damaged its reputation internationally. “It will take longer to repair that reputation than it will to repair gilt markets,” he said. I’m not sure his contribution to the UK’s reputation has been entirely positive…but he has a point. The autumn statement will be about restoring credibility in financial markets, and voters trust in the Tory party as the best stewards of the nation’s finances. Certainly, gilt markets are far steadier. The 10yr gilt yield sits where it did before the last mini-Budget at 3.1%, the 2yr around 2.93%. If we see this move much, then the chancellor will have under-delivered on the tax hikes/spending cuts that they have been talking up. He cannot skirt the fiscal hole of around £60bn. Sterling trades around $1.19 after a decent run up against the weakened greenback since last week’s US inflation data. At least chairman Hunt is helping to shore up sterling… 

Retail Re-Fail 

Retail sales figures data from the US showed consumers are still wearing higher prices, but they are doing so by using more credit, as is made clear by the household debt surveys. Sales rose 1.3% in October, more than the 1% forecast. Tend to think that the longer consumers keep wearing higher prices the more the Fed must do...but Target.  

Big miss from Target and doing a bit of a kitchen sink job with the guidance, offering a decidedly downbeat holiday season outlook. “In the latter weeks of the quarter, sales and profit trends softened meaningfully, with guests’ shopping behaviour increasingly impacted by inflation, rising interest rates and economic uncertainty" Target CEO Brian Cornell said. He said consumers were relying on borrowing or savings to manage weekly budgets...but these options are “starting to run out”.  

Fed Up: US Policy Makers at Odds 

Kansas City Fed President Esther George said it would make sense to slow the pace of rate hikes next year...sounds dovish but then the market expects a slowdown in December. San Francisco Fed president Mary Daly said pausing hikes is off the table.  

The problem for the Fed is this – they desperately want to slow down and pause but they don’t want to risk a re-acceleration in inflation which means they have to restart hiking rate, so they are keeping on keeping on for now and will probably halt later than expected. But then they risk doing too much. The Fed’s Harker put it: "I don't want to move interest rates way up and then way down." A dilemma. But my bet is that they did too much stimulus for too long, were slow to raise rates and rein in QE, and will do too much hiking for too long on the way out.   

Expecting the Expected: What’s Next? 

FTX contagion: Another shoe dropping, Genesis the latest to halt withdrawals in wake of FTX collapse...BlockFi ready to file for chapter 11 bankruptcy...I have nothing further to say about this topic. You were warned.  

 Mercedes cut its China electric vehicle prices by up to $33,000...signals big demand problems in the world’s largest market for electric vehicles. Tesla fell almost 4% against a 1.5% decline for the Nasdaq composite yesterday. Target’s warning dragged retail stocks and the S&P 500 ended 0.83% lower. 

Later today...Bullard, Jefferson and Bowman are the Fed speakers today. Philly Fed manufacturing index forecast at –6.0 from –8.7 prior. US weekly unemployment claims forecast at 228k from 225k previous.